Time to review your homeowners policy

If you’re like most homeowners, you can add another unread title to your must-read list: your homeowners insurance policy.

“So many people never look at it because their mortgage company pays their premiums,” says Madelyn Flannagan, vice president for education and research at the Independent Insurance Agents and Brokers of America, or IIABA, in Alexandria, Va. “The homeowners insurance market has been changing with things like mold. If your state is going to allow companies to exclude those things and you weren’t aware because you didn’t open your policy and see that little red sticker on the front, who’s at fault?”

An August 2005 IIABA survey found that at least 32 million U.S. households had ill-fitting insurance policies. Some were over-insured, others had major gaps in coverage. Fewer than 60 percent of respondents had performed “a comprehensive review” of their insurance coverage in the last two years, 16 percent had not done one since 2002, and 16 percent had never done one at all. (The remainder couldn’t recall.)

If you haven’t peeked at your coverage since the Clinton era, you might suddenly find yourself reading a real-life thriller. For starters, Flannagan says, sweeping changes to the home casualty industry two years ago, stemming from 1992’s Hurricane Andrew, bumped rates by 15 percent to 25 percent, the largest increase in 20 years.

Robert Hunter, director of insurance for the Consumer Federation of America, says home casualty companies have also shifted more of the risk to consumers. Some companies now cap what they’re willing to spend to rebuild your home but allow you to “buy up” additional coverage to protect against Katrina-esque skyrocketing rebuilding costs. Spiking liability claims for dog bites, mold and risky swimming pools and trampolines have caused further pullbacks in coverage for those hazards, as well.

“There are rate increases, but in many cases they are hidden as coverage reductions, which are the same thing as a rate increase,” says Hunter. “We are concerned that the industry has moved in the direction of laying more risk back on consumers.”

Renewal time is the best time to read your policy, review your homeowners coverage with your agent, and perhaps shop around for a better or cheaper policy. It’s also when your insurer can bump your rate or make changes to your coverage.

“There are huge variations in costs from equally strong companies,” says Stephen Pollan, personal finance mentor and author of the best-selling books “Die Broke” and “Live Rich.” “Probably the best company around is Chubb, but you can get the same kind of coverage for about 30 percent less if you shop.”

How can you tell if you’ve outgrown your homeowners policy — or whether it ever fit to begin with? Here’s what to look for before you renew your policy:

Know your policy

Your homeowners policy, which is regulated by your state, features three main components: home (loss to structures), contents (loss to personal property) and liability coverage. If your claim is approved, you pay up to your deductible and the company pays the rest based on terms and limitations of coverage. A typical deductible is $250 to $500. Some homeowners lower their premium by opting for a higher deductible of $1,000 or more.

Home: Your policy usually covers structural loss caused by fire, theft, winds, accident, falling trees, water damage from broken pipes and even terrorism, based on the estimated value of your home. Typically not included (exclusions) under so-called “all risk” coverage are war, nuclear disasters, earthquakes and floods. Separate earthquake coverage is relatively inexpensive and a good idea if your home is on shaky ground. Flood coverage, of course, is available only through the National Flood Insurance Program administered by the Federal Emergency Management Administration, or FEMA. Nearly 20,000 flood-prone communities participate in this program. If you live in a flood plain, you may be required to purchase flood insurance. If you’re not required to, it may be a good idea to purchase it anyway, especially if you live at sea level near a sea.

Contents: The contents of your home are typically insured against loss, damage or theft for 50 percent to 70 percent of the estimated value of your home; that is, if you have a $200,000 home, your belongings, furniture and clothing would be insured for $100,000 to $140,000. Personal property not specifically excluded is often insured wherever it goes, even on vacation. There are often conditions and limits placed on loss of certain items such as jewelry, cash, furs, artwork, antiques and wine collections; to insure these for replacement value, additional coverage is usually available at a very affordable rate. But according to the survey, nearly half (47 percent) of respondents who owned valuable collections didn’t own special insurance coverage for them.

Replacement cost versus actual cash value

Flannagan says most home policies today insure the contents of your house for actual cash value rather than replacement cost. What’s the difference? Actual cash value means you’ll only get what your 20-year-old sofa is worth today; with replacement-cost coverage, your policy will pay to replace it with a new one of like kind and quality.

“If you’re the kind of person who replaces stuff often or always has to have the best all the time, you want the replacement cost because you’ll be able to get another $3,000 couch,” Flannagan says. “You can purchase replacement cost on the contents and it’s not expensive.”

‘All risk’ versus ‘named peril’

If your policy is written as “all risk,” it means your home is insured for all causes of loss except those specifically listed as exclusions. If it’s written as “named peril” however, you are only covered for causes of loss that are specifically listed in the policy. “You want ‘all risk,'” says Pollan. “It’s the broader of the two.”

Extended replacement coverage

Simply put, replacement coverage ain’t what it used to be. Thanks in large part to Hurricane Andrew, if your house is a complete loss, most insurers will only compensate you for the home value on your policy and an additional percentage (usually 25 percent) for rebuilding overruns, not for the open-ended and often skyrocketing extra cost to rebuild in the high-demand environment of an Andrew or Katrina. Instead, you can “buy up” that extra coverage as an endorsement to your “replacement” coverage to fill in the gap in a worst-case scenario.

“If you live in a high-risk area, you want to buy up,” says Hunter. “If you don’t and your chances of getting a total loss are relatively low, maybe you won’t.”

Which is another way of saying that yes, you can be over-insured, especially if you’re covered to the max and your chances of a total loss are low.

Hot buttons

Insurers don’t like to pay liability claims, which can be costly. So they have taken to inserting exclusions and limitations aimed at limiting their exposure to lawsuits. Current hot buttons include mold, dogs, swimming pools and trampolines, all potential big-ticket lawsuits in the making. Some companies have excluded mold altogether. If you have or plan to acquire a dog, pool or trampoline, first comb your policy for exclusions and limitations. Many insurers maintain a watch list for dog breeds that wind up in court and may exclude or even deny coverage if you own a risky canine.

Credits and umbrella policies

It’s not all doom and gloom out there in insurance land. In fact, many companies now offer discount credits to homeowners who have several years without a claim or who bundle their auto, life and/or health policies with the same company.

The umbrella policy has become an increasingly popular and cost-effective way to shore up your liability coverage. According to Hunter, for $200 to $400, you can buy a $2 million umbrella policy over your home and auto policies.

“Take a high deductible on your property, say move from $500 to $1,000, and if you raise your deductible enough, you can probably save enough money to almost pay for the umbrella policy,” he says. “You’re giving up $500 worth of coverage at the bottom end to get $2 million in coverage at the top. That’s a pretty good deal.”

Shop around

Unhappy with rate hikes? Losing confidence that your insurer will be around when you need it? Shop around for a new policy. Although the insurance industry has not made it easy for consumers to compare apples to apples, many state governments have by providing easy-to-access buyer’s guides where you can view your state’s major insurance underwriters and compare features and prices. Log on to your state’s insurance commissioner’s Web site for details.

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